InnSuites Hospitality Trust — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 31, 2017; fiscal year ending January 31, 2018. Financial statements are unaudited. The Trust operates three hotels with 424 suites in Arizona and New Mexico and owns the IBC Hospitality Technologies business, which serves approximately 2,000 hospitality properties.
Financial performance
| Metric | Nine months 2017 | Nine months 2016 | Change |
|---|---|---|---|
| Continuing-operations revenue | $8.18 million | $6.82 million | +19.8% |
| Operating loss | $(1.36) million | $(1.79) million | Improved $0.43 million |
| Operating margin | (16.6%) | (26.2%) | Improved |
| Net loss from continuing operations | $(2.12) million | $(2.11) million | Essentially unchanged |
| Net income attributable to controlling interests | $8.62 million | $(2.45) million | Driven by property-sale gain |
| Adjusted EBITDA | $(1.12) million | $(1.02) million | Declined $0.09 million |
| FFO | $(1.99) million | $(1.66) million | Declined $0.33 million |
| Operating cash flow | $(1.39) million | $(0.81) million | More cash used |
Revenue growth reflected higher room revenue and rapid expansion of IBC Hospitality. Hotel operating metrics improved: occupancy increased to 75.81% from 71.78%, ADR rose to $79.48 from $72.21, and RevPAR increased to $60.50 from $52.07. Continuing-operations revenue increased 28.3% year over year in the third quarter to $2.72 million, while the operating loss narrowed to $(0.65) million from $(1.37) million.
IBC Hospitality revenue increased 84.5% for the nine months to $964,000 and 231% in the third quarter to $416,000. However, the segment remained loss-making, with a nine-month operating loss of $1.14 million and a third-quarter operating loss of $479,000, as sales, marketing, and platform-development expenses increased.
Balance sheet, cash flow, and debt
- Cash and cash equivalents were $7.62 million at October 31, 2017, compared with $479,000 at January 31, 2017. The cash-flow statement reports $7.63 million including $11,784 held by discontinued operations.
- Total assets were $25.95 million, versus $22.17 million at January 31, 2017. Trust shareholders’ equity increased to $9.34 million from $4.43 million; total equity was $10.16 million.
- Approximate debt outstanding at October 31, 2017 included $9.81 million of mortgage notes, $1.06 million of bank notes, and $2.01 million of other notes payable. Total current liabilities were $4.52 million.
- Investing activities provided $6.11 million, primarily from the Ontario hotel sale, while hotel capital expenditures totaled $2.15 million.
- Financing activities provided $2.34 million, including new mortgage borrowings, sales of non-controlling interests, and share issuance, partially offset by debt repayments and distributions to non-controlling interest holders.
- Management reported approximately $1.6 million of minimum debt payments due in fiscal 2018 and approximately $753,000 due in fiscal 2019.
Material changes and unusual items
- On June 2, 2017, the Trust sold its Ontario, California hotel for approximately $17.5 million. It used approximately $7.2 million to repay the property mortgage, $2.4 million to reduce accruals and payables, and retained the remainder for operations and capital improvements.
- The sale generated an $11.45 million gain and produced $10.85 million of net income from discontinued operations for the nine-month period. The gain was the principal reason consolidated net income was $8.73 million despite continuing-operations losses.
- Management and trademark-fee revenue declined 24.5% for the nine months and 44.3% in the third quarter, partly because an affiliate of the Chairman sold hotels that had generated these fees.
- The Trust sold additional non-controlling interests in hotel subsidiaries, particularly Yuma, and owned 15.90% of Yuma, 26.46% of Albuquerque, and 51.01% of Tucson at October 31, 2017.
- The Trust entered into a $5.0 million Tucson mortgage facility, a $850,000 Yuma credit facility, a $150,000 RepublicBank revolving line, and three $50,000 subsidiary business loan agreements during 2017.
- The Trust repurchased 126,667 shares during the nine months at an average price of $2.04 per share and had authorization remaining to repurchase 686,423 shares.
Liquidity, outlook, and risks
Management believes cash of approximately $7.6 million, together with available related-party and affiliate facilities of approximately $2.0 million and bank facilities of approximately $300,000, will be sufficient to meet obligations for at least the next year. Management is also evaluating refinancing, additional non-controlling-interest sales, and other funding options. The filing cautions that financing or asset sales may not be available on favorable terms or at all; failure to obtain funds could require sales of assets on unfavorable terms.
Management expects moderate economic improvement, higher occupancy, modestly improved rates, and continued IBC revenue growth. It expects capital expenditures to be approximately similar to the prior fiscal year but provides no assurance regarding the ultimate amount. Management also expects management and trademark fees to decline and IBC sales and marketing expenses to continue increasing with reservations revenue.
- The Trust remains exposed to hotel seasonality, competition, labor and operating-cost inflation, interest-rate changes, refinancing risk, and dependence on hotel cash flows.
- IBC faces competition, cybersecurity and system-availability risks, technology obsolescence, pricing pressure, and the risk of losing hotel contracts or travel suppliers.
- The Trust continues to market its remaining hotels for sale, but cannot predict whether or when additional sales will occur.
- The Trust received an NYSE American deficiency notice related to stockholders’ equity below $6.0 million and prior losses. Equity was approximately $9.3 million at October 31, 2017, and management expected to regain compliance, but stated that success is not assured.
- The Trust expects adoption of the new revenue standard beginning February 1, 2018 and initially believes revenues may be presented on a net rather than gross basis; the financial impact was still under evaluation.
- A $0.01-per-share cash dividend was approved on December 6, 2017, payable January 31, 2018 to shareholders of record December 20, 2017.
Investor verification points
- Separate recurring operating performance from the $11.45 million Ontario sale gain; continuing operations remained loss-making and cash flow from operations was negative.
- Reconcile reported cash, available credit facilities, near-term debt maturities, and required capital expenditures against ongoing operating cash needs.
- Assess whether IBC can convert strong revenue growth into positive operating income after elevated sales, marketing, and technology costs.
- Monitor the decline in management and trademark fees following affiliated hotel dispositions.
- Verify NYSE American listing compliance and any subsequent financing, refinancing, or hotel-sale activity.
- Review related-party advances, loans, share and partnership-unit purchases, guarantees, and the concentration of control held by the Chairman and his affiliates.
- Evaluate the effect of adopting revenue recognition guidance on reported revenue levels, margins, and comparability.